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First-time homeowners might qualify for one of many types of loan programs, including those from the Federal Housing Administration (FHA) and the Federal National Mortgage Association (Fannie Mae). Both programs are attractive for their low down payment requirements. However, there are distinctions regarding credit scores and eligibility.

Program Overviews

Neither the FHA nor Fannie Mae issues loans. The FHA program insures loans to protect lenders against default. This gives lenders the ability to take on higher-risk borrowers who have less capital for a down payment and lower credit scores.

Fannie Mae is a publicly traded entity managed under government charter that buys loans from lenders, freeing up lender assets to keep underwriting more loans for economic stability or growth. It is possible for borrowers to qualify for both programs with different terms and conditions.

Federal Housing Administration Eligibility

Lenders look at credit, income and debt along with down payment ability when underwriting an FHA loan. Borrowers must have a minimum credit score of 500 to be eligible for the program. With scores from 500 to 580, borrowers must provide a 10 percent down payment. Borrowers with credit scores better than 580 are eligible for a 3.5 percent minimum down payment. This down payment might also come from a seller's credit in the transaction, making an FHA loan especially attractive to first-time homeowners who might not have equity in another property or enough savings to use as a down payment.

When it comes to having enough income to cover your monthly obligations, the FHA loan uses a "31/43" debt-to-income standard. The 31 is the percentage of all monthly debt obligations divided by monthly income; this is called the front-end DTI. The 43 is the back-end DTI; it adds the mortgage into the monthly debt obligations. Lenders don't want your monthly debt to exceed 43 percent of your monthly income, reducing risk of financial hardship.

Fannie Mae Eligibility

Fannie Mae loans are not as forgiving in credit or down payment requirements as FHA loans. Fannie Mae requires a minimum credit score of 620 for fixed-rate mortgages and 640 for adjustable-rate mortgages. The typical minimum down payment is 5 percent for fixed-rate mortgages and 10 percent for adjustable-rate loans; however, there is a 3 percent down payment program for creditworthy borrowers who are specifically first-time homebuyers. Multiunit dwellings require higher down payments.

When it comes to evaluating the DTI, Fannie Mae is more forgiving because of the higher credit score standards. As of July 2017, Fannie Mae increased its DTI maximums, approving loans for borrowers with DTIs anywhere from 45 to 50 percent. The top end is still contingent on credit score, assets and income.

Key Comparisons

When shopping for a loan, FHA loans benefit borrowers with an overall lower credit requirement and seller credits to assist with the down payment. Fannie Mae has much higher credit standards but allows tighter margins when it comes to overall monthly debt obligations.

About the Author

Kimberlee Leonard lived in the Bay Area while going to school at the University of San Francisco. Before becoming a full-time writer, she worked for major financial institutions such as Wells Fargo and State Farm. She has developed content for brands such as Trupanion, Live Your Aloha, Neil Patel and Home To Go. She currently lives in her home state of Hawaii with her active son and lazy dog.

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Leonard, Kimberlee. "What Is the Difference Between an FHA Loan and a Fannie Mae Loan?" Home Guides | SF Gate, http://homeguides.sfgate.com/difference-between-fha-loan-fannie-mae-loan-2788.html. 19 July 2017.

Leonard, Kimberlee. (2017, July 19). What Is the Difference Between an FHA Loan and a Fannie Mae Loan? Home Guides | SF Gate. Retrieved from http://homeguides.sfgate.com/difference-between-fha-loan-fannie-mae-loan-2788.html

Leonard, Kimberlee. "What Is the Difference Between an FHA Loan and a Fannie Mae Loan?" last modified July 19, 2017. http://homeguides.sfgate.com/difference-between-fha-loan-fannie-mae-loan-2788.html

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